Probably the biggest impact of recent events has been felt in the area of pensions, namely pension deficits and significantly reduced annuity rates. Pension deficits on many final salary pension schemes have increased on account of the fact that falling gilt and AA rated corporate bond yields have increased pension scheme liabilities by more than the increase in asset values. Around 80% of the UK’s final salary pension schemes are believed to have deficits and this situation has worsened since the EU referendum vote.
For those interested in transferring out of a final salary scheme into a personal pension however, the latest sharp fall in gilt yields may be good news, as cash equivalent transfer values are likely to increase.
Saving for a pension has not, as yet, been directly impacted by this summer’s uncertainties. It is not difficult to imagine higher rate tax relief again coming under threat, particularly if there is a risk of a downturn in the UK’s public finances. Indeed, for some higher earners, a reduction in pension tax relief has already occurred. This is because legislation was introduced this tax year to restrict the annual pension savings allowance for those people earning in excess of £150,000. In addition, the lifetime allowance also reduced to £1 million on 6th April 2016 and the net effect of these changes has resulted in a number of people deciding to cease saving into pensions altogether.
Despite this, we believe that pension saving up to the lifetime allowance should still form a central part of a financial plan. Should a higher rate tax relief become unavailable, this strategy will need to be revisited, but in the meantime, pension saving provides the most tax-efficient way of building up fund for retirement.